Salary sacrifice – allowing employees to offset part of their cash earnings for a non-cash item of equal value – can sometimes be an attractive benefit for employees particularly if tax and National Insurance contributions don’t apply to the non-cash item.
It’s also something that can be financially beneficial for employers but, as they are responsible for ensuring the correct amount of tax and National Insurance contributions are paid on behalf of their employee, offering salary sacrifice can be less easy to manage and administer.
How salary sacrifice works is best illustrated by example.
Example 1: An employee earns £500 per week but sacrifices £100 of this in exchange for £100 of childcare vouchers. Tax and National Insurance is now due on £400 per week so less is paid. Childcare vouchers are exempt from both tax and National Insurance so, overall, your employee pays less tax and you both pay less National Insurance.
Example 2: An employee earns £30,000 per year but choses to sacrifice £5,000 of this in exchange for a £5,000 employer contribution to their pension scheme. Tax and National Insurance is now due on only £25,000 so your employee pays less tax and you both pay less National Insurance.
Although it sounds good in principle, there are a number of things that need to be considered by both the employer and the employee as there are potential disadvantages.
- Increased administration for the employer
Employers are responsible for ensuring their employees pay the correct amount of tax and National Insurance; the amount due being dependent on the employee’s cash pay and the non-cash benefits they are receiving under the salary sacrifice arrangement. Although the adjustment to the cash component will be handled by the PAYE system, the non-cash benefits will be subject to different tax and National Insurance rules and these will have to be individually assessed.
In addition, reporting requirements for many non-cash benefits are different to those for cash earnings: in general, benefits must be reported to HMRC at the end of the tax year using forms P11D or P9D.
- Reduced State Benefits for the employee
Salary sacrifice may reduce the cash earnings on which National Insurance is charged and this may mean that employees therefore pay, or are treated as paying, less or no National Insurance.
This may affect an employee’s entitlement both to contribution-based benefits such as Incapacity Benefit and the State Pension and to earnings-related benefits such as Maternity Allowance and the Additional State Pension.
It can also affect the amount of statutory pay an employee is entitled to receive and could cause some employees to lose their entitlement altogether.
Workplace pension schemes
Employers should discuss the implications of salary sacrifice with their pension scheme providers, firstly to establish whether such an arrangement is allowable under the terms of the scheme and then to identify the potential implications.
How can One Financial Solutions help you?
As a firm of independent financial advisers we can provide you with impartial advice to help you design and create an employee benefits’ package with a competitive edge; one that can make a real difference both to who you recruit and who you retain.
We’ll help you plan an appropriate strategy, recommend the best products from across the whole of the financial services’ market and help build and develop the package you need. If you already have an employee benefits’ package, we’ll review it and recommend changes we think could turn it into something hard to refuse. We can provide an annual review to ensure your employee benefits’ package remains fresh and competitive, grows in value as your employees’ careers develop and stays within your budget.
So, if you’re looking for help with any aspect of your employee benefits’ package, please call us on 020 3714 9565 or ask us to call you by sending an email to firstname.lastname@example.org.